NEW ORLEANS — When it comes to minimizing the chances of a securities markets catastrophe such as the 2008 national financial crisis, Tulane Law Professor Onnig Dombalagian believes prevention is better than a cure -- and in this case, prevention is transparency.
“There’s the question of if we can prevent crisis, and then there’s the question of how do we handle inevitable crisis,” Dombalagian told the Louisiana Record. “It’s very difficult to come up with a regulatory scheme that prevents crisis. What we can do is provide signals to the market that signal a potential crisis and build remedial mechanisms to help mitigate the severity of crashes after the fact.”
Dombalagian, who also sits on the National Adjudicatory Council of the Financial Industry Regulatory Authority (FINRA), asserts that encouraging markets to be more transparent with investors is one of the best ways to regulate securities markets.
“In the last crash, we had markets that had access to information about various subprime mortgages, and these signaled to certain market participants, but not to all market participants, that the market was overvalued," he said. "In that sense, transparency is a great tool."
An added benefit of being transparent is that when information is easily passed from firms to investors, investors will have the ability to make well-informed decisions, and the integrity of securities markets will in turn stimulate the flow of capital into the market.
Dombalagian said transparency isn’t the only tool that can improve securities markets. He believes regulatory tools such as establishing better liquid authority and Fair Fund provisions have their significance. They can help mitigate the severity of crisis, but it’s often too late by the time regulators take action.
“Regulation is a blunt tool," he said. "There are times when the incentives of the market are simply not to provide certain kinds of information. And in those circumstances, specific disclosure requirements like rules or standards are necessary.”
Although some market participants may be hesitant to share information, Dombalagian believes there is a genuine desire to create a transparent market. What is needed to accomplish the goal is “greater regulatory-sanctioned cooperation” from industry members. He added that although the U.S. Securities and Exchange Commission (SEC) has made great progress in the last decade, it still faces some challenges in getting certain markets to advertise inventory and share indications of interest with the public through regulation.
Dombalagian has taken his teachings beyond the walls of his classroom to a larger audience. He has shared his insight in several articles, and his new book Chasing the Tape: Information Law and Policy in Capital Markets is part of an MIT Information Policy series that discusses different approaches to regulatory information.
“The goal of the book is to think about more than what disclosure requirements are, or what intermediary duties are, and to think about the whole process by which information is generated, disseminated, processed and ultimately used by investors," he said.
Dombalagian joined the Tulane Law faculty in 2003 after gaining experience in market regulation as an attorney fellow at the Securities and Exchange Commission, and in private practice as an associate at Cleary Gottlieb Steen & Hamilton. He is approaching the end of a three-year term at FINRA -- the largest independent regulator of securities firms doing business in the United States.
Through his influence in various capacities, Dombalagian strives to encourage the accessibility and natural flow of high-quality information from firms to investors in a way that is easy to process.